Insights

Chinese investors have last laugh for 2015

22 January 2016

When investors are small children, they believe in Santa Claus. When they are older and more cynical, they still believe – but in the Santa Claus rally, that seasonal phenomenon that (according to the Stock Trader’s Almanac) adds roughly 1.5 per cent to the broad US stock market in the final five trading days of the year and the first two trading days of the new year.

Parents of course shield their children from the reality that Santa Claus does not come, but there was no shielding investors from the reality that this year, neither did the Santa Claus rally – not helped by continued concerns over China’s economic slowdown, and International Monetary Fund (IMF) chair Christine Lagarde’s 31 December warning of slowing global growth.

The US markets slumped wearily into the holiday break, with the 30-stock Dow Jones Industrial Average down 1.7% for December, the broad S&P 500 Index down 1.8% and the technology-heavy Nasdaq Composite Index showing a loss of 1.5%. The S&P 500 and Dow Jones both ended weaker for the year, down 0.73 per cent and 2.2 per cent respectively, the worst year for the Dow since 2008 and the S&P 500’s first loss since 2011, while the Nasdaq Composite streeted them with a 5.5 per cent gain.

US rates woken from nine-year sleep

The highlight of December was the unanimous vote of the Federal Open Market Committee (FOMC) to lift US interest rates – technically, to raise the target on the federal funds rate – by 25 basis points (0.25 per cent), lifting the range to 0.25 per cent–0.50 per cent. Although a modest change, this represented the first US interest rate rise in nine years, ending the extraordinary period of near-zero official interest rates that had been in place since the end of 2008.

The rate rise has to be seen as a vote of confidence in the US economy, based as it was on strengthening US jobs growth, which bolstered the Fed’s confidence that real US GDP growth would amount to at least 2 per cent for the next three years. While that does not sound all that impressive, the return of the US economy to growth is definitely a welcome sight, while global growth concerns linger and commodity prices remain under heavy pressure.

Global growth concerns linger

IMF head Lagarde said on the final day of the year that global economic growth would be “disappointing” in 2016. In October, the IMF forecast world economic growth of 3.5 per cent for 2016, the slowest rate since the immediate aftermath of the September 2008 financial meltdown. While the IMF has not officially changed its numbers, its partner institution, the World Bank, has downgraded its 2016 growth estimate from 3.3 per cent (in June 2015) to 2.9 per cent.

European markets also had a sorry December, led lower by the CAC-40 Index in Paris (down 6.5 per cent for the month) and the German DAX (down 5.6 per cent). The broad Stoxx Europe 600 Index lost 5.2 per cent, while the FTSE-100 in London shed 1.8 per cent. However, European markets outperformed their peers in 2015, with both the DAX and the CAC 40 up about 10 per cent for the year, and the Stoxx Europe 600 up almost 8 per cent, bolstered by economic stimulus measures from the European Central Bank (ECB).

Chinese investors have last laugh for 2015

In Asia, the problem-child market for the second half of the year – China – actually ended the year strongly, with the Shanghai Composite Index gaining 2.7 per cent in December, bringing its rise for 2015 to 10.5 per cent. (That was almost a cruel joke to investors still scarred by the full-scale market corrections triggered across the world by Shanghai’s 28.6 per cent slump in the third quarter.) In Tokyo, the Nikkei lost 3.6 per cent in December, but showed a 9.1 per cent gain for 2015. In Hong Kong, the Hang Seng Index dropped 0.4 per cent in December on its way to a loss of more than 7 per cent for 2015; in fact, the Hang Seng took more of the brunt of global investor concerns over China than Shanghai did, because it is where the real heavyweight Chinese stocks are listed.

In Australia, the S&P/ASX 200 Index edged to a 2.5 per cent gain for December, mounting an impressive comeback after the US rate rise; the benchmark index entered December down 4.5 per cent for the year, and prior to the Fed decision the local market was staring at a loss of 9.3 per cent. But the strong finish to the year could not bring the index into the black - the S&P/ASX 200 finished 2015 down by 2.1 per cent. Investors needed dividends to get out of the red; the S&P/ASX 200 Accumulation Index eked out a 3 per cent gain for the year. Commodities generally had a torrid 2015, but oil took the cake, plunging more than 30 per cent for the year.